James L. Gattuso began his article, "Meltdowns and Myths: Did Deregulation Cause The Financial Crisis," with the following: "easy answers are seldom correct ones." The film, The Inside Job, was most impressive with its data on the financial crisis of 2008, but it felt there were "easy" answers where additional research might have been warranted.
In fact, I wondered at times if The Inside Job was a true documentary on the causes and effects of the crisis or more of a political agenda film. After watching the film there was certainly a feeling of disgust for the greed of the players involved but there was also dismay for the producer of the film who seemed quick, at times, to point fingers at one political party or group of people over that of others who were also intrinsically involved. While at times informative, it may be a stretch to label this movie as a documentary, which is defined as "recreating an actual event that purports to be factually accurate and contains no fictional elements."
The film begins in Iceland contrasting the country's economy before and after deregulation; before and after the "Great Depression of 2008." Deregulation. This was the underlying theme and villain of the movie that the producer believes led up to the worst financial mess since 1930 - deregulation either bred greed or greed brought about deregulation. Under Section 1, How We Got Here, the narrator (Matt Damon) takes us back to the Reagan Administration's efforts in deregulating the financial system. He attributes the former president's deregulation policies as the impetus behind the financial debacle of 2008, generating greed and power at the top echelons of some of the most powerful investment banks - Morgan Stanley, Bear & Stearns, Lehman Brothers, Goldman Sachs. However, was it deregulation that led to the crisis? A 2009 Cato Policy Report, "Did Deregulation Cause the Financial Crisis?" quotes a Mercatus Center study in which the authors determined that "outlays for banking and financial regulation increased from only $190 million in 1960 to $1.9 billion in 2000 and to more than $2.3 billion in 2008 (in constant 2000 dollars)." The report's author, Mark A. Calabria, goes further by pointing out that the "annual average of new rules proposed [by the Department of Treasury] increased from around 400 in the 1990s to more than 500 in the 2000s."
I wish the producer of The Inside Job had reviewed and reported on the financial and political activities that occurred in the 1970s. Gary Gorton and Andrew Metrick authored a white paper, "The Federal Reserve and Financial Regulation: The First Hundred Years," in which they discussed the rise of the money-market mutual funds (MMMFs) that grew exponentially in the first few months of 1979. According to Gorton and Metrick, "a MMMF effectively promises 'stable value' on all investments." (Gorton and Metrick, 2013, p. 17) They further reported that "even more than the quantity competition, the existence of MMMFs eroded the profit margins for traditional banking products, and forced banks to use price competition where non had existed before (Keeley and Zimmerman, 1985)." Traditional bankers, during this time period, were beginning to see their profitability erode, which was made worse with the advent of corporate bonds and commercial paper invading the marketplace. The competitive forces hitting traditional bankers on both sides of their balance sheets would soon pressure legislators and regulators to "loosen restrictions on bank branching and product scope." (Gorton and Metrick, 2013, p. 17)
"The CRA was the impetus in lowering lending standards, thereby introducing into the system questionable housing loans (subprime mortgages) that would eventually be repackaged as Collateralized Debt Obligations (CDOs)".
A monumental piece of legislation that was not discussed in the movie was The Community Reinvestment Act (CRA), signed by President Carter in 1977, which "forced banks to lend to uncreditworthy borrowers." (Sheppard, 2008, p. 1) It may not have been the sole contributor to the financial crisis, but it promulgated such risky issues as "no money down" mortgages. The CRA was the impetus in lowering lending standards, thereby introducing into the system questionable housing loans (subprime mortgages) that would eventually be repackaged as Collateralized Debt Obligations (CDOs). John Carney would state in his article, "Here's How the Community Reinvestment Act Led to the Housing Bubble's Lax Lending," that "the CRA was not a static piece of legislation. Regulators, beginning in the mid-nineties, began to hold banks accountable in serious ways." He would go on to state that "the government pushed for greater mortgage securitization in an effort to increase CRA lending." In the article, "CDOs - Their Role in the Financial Crisis," the author points out that "had the traders in the summer of 2006 decided to write off the toxic assets they found themselves with rather than re-package and re-sell as they did, the financial crisis would have almost certainly had far less an impact than it did and is having."
While not attributed as a reason for the crisis' in Joe Miller's article, "Who Caused the Economic Crisis?", there are some who believe that regulators did not exert proper due diligence nor notification in assessing any potential wrongdoing. Richard Kovacevich, Chairman Emeritus at Wells Fargo, states in his article, "The Financial Crisis: How the Conventional Wisdom Has It All Wrong," that "none of these past crises [1974-76, 1980-82, and 2008-09] occurred because of lack of regulatory authority but rather the failure of regulators to use their existing authority, effectively, to rein in excessive speculation by financial institutions." This was also echoed throughout the documentary. One topic discussed centered on derivatives which were more risky; banks could gamble on anything. In an effort to regulate this $50 trillion business, Clinton appointee Brooksley Born attempted to do such but was overridden. Alan Greenspan would later come out and state that there wasn't a need for such regulation.
As for the repeal of the Glass-Steagall Act, Damon mentions the derogatory effect of the Gramm-Leach-Bliley Act of 1998. The Glass-Steagall Act (otherwise known as the Bank Act of 1933) separated commercial banking from investment banking. The documentary suggests that Gramm-Leach-Bliley contributed to the financial crisis, giving investment banks the push to take on greater risks while holding less equity. However, Calabria counters with two points:
1- Prior to the passage of Gramm-Leach-Bliley, investment banks "were already allowed to trade and hold the very financial assets at the center of the financial crisis: mortgage-backed securities, derivatives, credit-default swaps, collateralized debt obligations." The capital base of investment banks was increasing because such banks were going public, which was allowed under Glass-Steagall.
2- There weren't many financial institutions that combined investment and commercial banking tasks.
Former President Bill Clinton would say in a 2008 Newsweek article that "I don't see that signing that bill [Gramm-Leach-Bliley Act] had anything to do with the current crisis." Authors Yaron Brook and Don Watkins stated in their report, "Why the Glass-Steagall Myth Persists," that the Gramm-Leach-Bliley Act "ended the affiliation restrictions, freeing up holding companies to own both commercial and investment banks. There is zero evidence this change unleashed the financial crisis."
"There may be some long-term damage to manufacturing on an international level, but U.S. manufacturing has been in a decline long before 2008".
Finally, while the economy has yet to recover fully from the 2008 financial crisis, I don't believe it accurate for the film to associate the demise of the manufacturing sector in the U.S. to the crisis. There may be some long-term damage to manufacturing on an international level, but U.S. manufacturing has been in a decline long before 2008. In the article, "Why is America's Manufacturing Job Loss Greater Than Other Industrialized Countries?," the author pulls in data from the Bureau of Labor Statistics (BLS) that shows the U.S. economy, between 2001 and 2010, shed 42% of its manufacturing jobs. In fact, the author mentions "job movement data from 2000 to 2001, when the American manufacturing sector lost over 1.2 million jobs, one of the single worst years for U.S. manufacturing job loss over the past two decades." (Author Unknown, 2014, p. 2)
The Inside Job, overall, was very enlightening. It shows the greed and power of those at the top both during and after the crisis. But let's not make this a class warfare issue. It is, again, an ethical collapse on a monumental scale. Miller, in his article, "Who Caused the Economic Crisis?," believes some of those at fault include:
1- The Federal Reserve
2- Home buyers
4- Real estate agents
5- The Clinton Administration
6- Mortgage Brokers
7- Alan Greenspan
8- Wall Street firms
9- The Bush Administration
10- The Mark-to-Market accounting rule
As mentioned above, I believe The Inside Job falls short of depicting the entire root cause of why the financial crisis occurred. Is more corporate governance needed? What is the point of more regulations? As Mr. Kovacevich and others point out, regulators knew what was going on and essentially looked the other way. In order to have a full understanding of what led up to the financial crisis, a documentary must delve into all facts, regardless of the parties involved. Only then will we be able to get in front of issues, being proactive instead of reactive.
CDOs - their role in the financial crisis. Retrieved from https://sites.google.com/site/sparemoments/my-articles/cdos-their-role-in-the-financial-crisis
Brook, Y. and Watkins, D. (November 12, 2012). Why the glass-steagall myth persists. Retrieved from http://www.forbes.com/sites/objectivist/2012/11/12/why-the-glass-steagall-myth-persists/
Calabria, M. A. (July/August 2009). Did deregulation cause the financial crisis? Retrieved from http://www.cato.org/policy-report/julyaugust-2009/did-deregulation-cause-financial-crisis
Carney, J. (June 27, 2009). Here's how the community reinvestment act led to the housing bubble's lax lending. Retrieved from http://www.businessinsider.com/the-cra-debate-a-users-guide-2009-6
Ferguson, C. (Producer and Director). (2011). The Inside Job [Motion Picture]. United States: Sony.
Kovacevich, R. (Fall 2014). The financial crisis: why the conventional wisdom has it all wrong. The Cato Journal, 34(3), 541-556.
Miller, J. (October 1, 2008). Who caused the economic crisis? Retrieved from http://www.factcheck.org/2008/10/who-caused-the-economic-crisis/
Nager, A. (August 21, 2014). Why is america's manufacturing job loss greater than other industrialized countries? Retrieved from http://www.industryweek.com/workforce/why-americas-manufacturing-job-loss-greater-other-industrialized-countries
Sheppard, N. (September 20, 2008). IBD: carter more to blame for financial crisis than bush or mccain. Retrieved from http://www.newsbusters.org/blogs/noel-sheppard/2008/09/20/ibd-carter-more-blame-financial-crisis-bush-or-mccain